Corporate Failures: Declines, Collapses, and Scandals

Aims and Scope

Corporate failures resulting from financial instability or scandal have serious negative consequences for all stakeholders, including employees, business partners, investors, creditors, auditors, regulators, capital markets, and society at large. The impact is even more severe when these events happen concurrently with economic stress, such as during the recent financial crisis, or when they occur on an industrywide basis, such as with the diesel emission scandal. This can lead to widespread negative effects in a particular country, or even unfold contagion effects across countries and industries. Furthermore, the effects of these events are usually profound, and can range from long-lasting negative reputational damage to the collapse of entire industries.

Establishing a clear understanding of the drivers of corporate failure is key. Unfortunately, the task has been overly challenging for researchers, partly because of misconceptions about how exactly to define it. Corporate failure has generally been deemed the cessation of operations by a corporation due to involvement in court procedures, or voluntary actions such as bankruptcy. We believe in taking a somewhat broader view of corporate failure, whereby a firm may be considered a failure if it does not meet particular objectives set forth by shareholders, stakeholders, and management. This type of failure is often linked with various agency problems, ineffective corporate governance, and misplaced incentives.

Some recent scandals and corporate failures of large corporations have underscored the impact on the capital market and society as a whole. They have highlighted the need for regulators to rethink regulatory frameworks and enforcement, and for corporations to rework their organizational structures and business ethics. For example, the financial industry appears especially prone to scandals, even after the hard lessons of the financial crises. Several large global banks, including Deutsche Bank, Merrill Lynch, Santander, JPMorgan, and Commerzbank, were involved in one of the largest tax evasion trading schemes in history, referred to as "cum-ex," where bank clients falsely claimed multiple tax rebates on capital gains taxes. This resulted in treasury costs of about €55.2bn. Similarly, major banks were accused of committing fraud and collusion in their rate submissions to LIBOR, which is the underlying for many derivatives and contracts, including mortgages.

However, even the perceived saviors in the finance arena called “Fintech” have disrupted the industry itself by increasing the margin pressure on established banks. Margin pressure was cited as the primary reason behind Wells Fargo’s recent scandal, where the bank charged over 800,000 customers for unwanted auto insurance. And Fintechs also seem to have become victims of their own success and high growth. For example, shares of the financial service provider Wirecard dropped by 25% on January 30, 2019, after it was accused of using forged contracts in multiple suspicious transactions.

Another example is the rise of Initial Coin Offerings (ICOs). This less regulated form of crowdsales, created to raise funds through a blockchain by selling venture-related tokens or coins in exchange for legal tender or cryptocurrencies, garnered enormous attention during 2017 and 2018. ICOs ultimately raised tens of billions of dollars. Unfortunately, according to Statis Group, about 80% of the transactions completed in 2017 have been identified as scams.

All of these recent events have raised fundamental questions that will be addressed in this special issue. We welcome the submission of research papers on the following topics:

Insider Trading

• What problems are associated with current insider trading regulations, and how can we improve the regulatory framework (e.g., penalties for breaking the law) to ensure effective enforcement of current laws?
• What are the direct and indirect detection mechanisms for illegal insider trading? What is an optimal and reliable detection policy?
• What ethical and economic issues are associated with insider trading, and how do they interact?

Market Manipulation

• How do accounting scandals affect firm, market, and investor confidence? What are the most effective methods to restore investor confidence after a major corporate scandal?
• What aspects of corporate governance structures and executive compensation schemes encourage or prevent managers from engaging in fraudulent or deceptive conduct?
• How do disclosure-disciplining mechanisms in general, and shareholder litigation in particular, mitigate the problem of illegal or unethical insider behavior? What are the problems associated with the current laws, and what potential new regulations could improve the regulatory framework?

Tax Evasion

• How does a firm’s corporate governance structure impact illegal tax evasion behavior? And how do managerial incentives (versus shareholder value maximization) motivate tax avoidance behavior?
• What are the economic impacts of tax evasion on firm value, and how does it differ among countries with different legal and cultural environments?
• How do offshore intermediaries help firms evade taxes and violate regulations? What potential channels could improve regulation?
• What are the most effective detection mechanisms to uncover tax evasion? And how does detection probability affect their use by firms?

High Frequency Trading (HFT)

• What are the positive and negative impacts of HFT and algorithmic trading on the equity market?
• What problems are associated with the current and suggested regulations on HFT (e.g., a per trade tax, implementation of fees, restricting the number of cancelled orders, etc.)? How can we improve HFT regulations in order to block potential channels for financial misconduct?
• What are the potential ethical/legal problems arising from the use of sophisticated and high-speed computer programs for generating, routing, and executing orders? How does it affect investor confidence (and also fairness perception) in financial markets?

Initial Coin Offerings and Crypto Assets

• What legal issues are associated blockchain-based coins and tokens?
• What are the potential channels for digital currency scams, and how can the regulatory framework be improved to mitigate the problem?
• What are the benefits and costs associated with crypto assets?
• How should the Initial Coin Market be regulated?

Details of Paper Submission and Due Date

Interested contributors should submit preferably full papers (only in English), but extended abstracts (1,000 to 1,500 words) may also be considered if they show considerable promise no later than September 30, 2019. Papers are submitted to the attention of the Guest Editors Rebel Cole (coler@fau.edu), Sofia Johan (sjohan@fau.edu), and Denis Schweizer (denis.schweizer@concordia.ca) with the subject heading: "Corporate Failures: Declines, Collapses and Scandals."

Based on these drafts, the Guest Editors in consultation with the Scientific Committee Members will select manuscripts that are most likely to result in first-rate, high-impact publications. Authors will be notified on or before November 30, 2019 if their papers are accepted for presentation at the International Conference on Corporate Failures: Declines, Collapses and Scandals that will be held the College of Business, Florida Atlantic University (Boca Raton, U.S.) February 29, 2020. Following the conference, authors will be invited to revise their papers based on the Guest Editors’ comments and those from the discussants and conference participants. Authors will then be asked to submit their revised version through the journal portal (https://www.journals.elsevier.com/journal-of-corporate-finance/) by August 1, 2020, to be peer-reviewed by two anonymous referees based on Guest Editors recommendation. Journal of Corporate Finance General Editors will make final decisions. After the normal review process, we expect to publish the Special Issue during the second half of 2021.

The International Conference on Corporate Failures: Declines, Collapses and Scandals will be conjointly organized by John Molson School of Business (Concordia University, Montreal, Canada) and Florida Atlantic University (Boca Raton, U.S.)